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Medicare Privatization Fact Sheet

Background. Since the 1980s, private insurers have been allowed to enroll Medicare beneficiaries in private health plans that replace traditional Medicare coverage because many in Congress thought "managed care," particularly HMOs, might be more efficient and able to provide benefits at lower cost.  Only a small number of insurers got into the Medicare business, however, because most felt they couldn't cover such a high-use population at Medicare's payment rates and still earn the profits they desired.

To realize their vision of a privatized Medicare, conservatives in Congress pushed for substantial payment increases for private plans in 2003. They hoped the higher rates would encourage insurers to offer new types of Medicare-replacement plans and enroll more seniors. In 2008, on average, these private "Medicare Advantage" plans are paid 13 percent more (over $1,000) than it costs the original Medicare program to cover a beneficiary. Depending on location and other factors, however, some Medicare Advantage (MA) plans receive 40 percent, 50 percent, even 70 percent above the cost of traditional Medicare. These overpayments increase profits and also pay for marketing, sales commissions and some benefit improvements.

Overpayments Threaten Medicare's Financial Solvency.  Because the overpayments generate large profits, insurance companies have begun to aggressively market their plans. Today, 20% of Medicare beneficiaries are now in private plans rather than in traditional Medicare (up from 13% in 2003). 

These excess payments to the private insurance industry are worsening Medicare's financial health.  Enrollment in MA plans will soon represent a quarter of all Medicare beneficiaries, with the biggest growth in the most expensive plan-type: private fee for service plans (PFFS). These PFFS plans get the largest overpayments, averaging 17% more than traditional Medicare costs, per beneficiary. Ironically, they're not "managed care" and employ none of the efficiencies envisioned by Congress in the 80s.

Over the next ten years, the overpayments will add over $160 billion to the cost of Medicare. These additional outlays will ultimately force major changes in the system, including benefit reductions and higher out-of-pocket costs for seniors and the disabled.

Medicare Beneficiaries are Already Paying More.  Because beneficiaries pay a portion of Medicare-cost increases in the form of higher Part B premiums, all seniors, not just those in the private plans, are now paying an extra $36 a year to subsidize overpayments to MA plans (up from $24 in 2007). As a result, the majority of beneficiaries is subsidizing the minority who are in Medicare Advantage, while helping insurance companies make record profits.

Private Plans Reduce Needed Services.  Insurance companies that offer private Medicare coverage are lobbying furiously to keep their excess payments.  They argue that MA plans provide more services to beneficiaries than traditional Medicare. The law does give the plans flexibility to redesign coverage, which often results in additional benefits, such as eyeglasses or gym memberships. These are designed to appeal to healthy seniors, who are cheaper to cover. At the same time, however, the plans are allowed to offset the new benefits by cutting services or coverage needed by older and sicker beneficiaries.  For example, some private plans have higher co-payments for hospital care and chemotherapy.  As a result, sicker seniors can end up paying much more than they would under traditional coverage.

There are many other disadvantages to MA. Unlike traditional Medicare, some plans - particularly HMOs - restrict choice of doctor and access to specialists. Also, many health care providers refuse to participate in MA private fee-for-service-plans (generally due to a plan's lower reimbursement rates and/or slower payment schedules). Meanwhile, 97% of doctors and most hospitals participate in traditional Medicare.

AFSCME's Position: Congress must act soon to reduce the overpayments and create a level playing field between traditional Medicare and Medicare Advantage plans. In order to avoid disruption for beneficiaries already enrolled in the private MA plans, it may be necessary to roll back the overpayments gradually.  Some of the savings realized from the rollback  should be used to improve the prescription drug benefit, improve health services for low- and moderate-income beneficiaries, prevent a cut in Medicare reimbursements to physicians and fund other health care priorities. 

Nearly all these goals were embodied in the CHAMP Act, which was passed by the U.S. House of Representatives in July of 2007 (H.R.3162). The bill featured Medicare improvements and a rollback in MA overpayments. The Senate, however, failed to take up the bill.  So, in the spring of 2008, the House passed H.R.6331 (by an overwhelming vote of 359 to 55), which was designed to head off a scheduled cut in physician reimbursements, expand preventive services, help more beneficiaries pay Medicare premiums, and begin to reduce MA overpayments and rein in private plans. Not as strong as the earlier bill, it's still a good piece of legislation.  This time, the Senate also took up the bill, but sponsoring Democrats faced a huge obstacle to floor action: the Republican leadership's effort to block the bill by filibuster. After bringing the bill up twice, the Dems finally broke the filibuster on July 9, when Sen. Edward Kennedy (D-MA), undergoing chemotherapy for a brain tumor, returned to the Senate to cast the decisive vote.

Despite the dramatic Senate action, President Bush made good on his promise to veto the bill, citing the changes to MA plans as his reason. The Senate was able to override the veto, however, with 18 Republicans joining the Democrats.  While this was a huge victory for beneficiaries over insurance companies, more action is needed in the next Congress to roll back the overpayments and level the playing field between Medicare and private MA plans.

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